John Ellmore
Tim Leonard
The Help to Buy scheme in England has now closed to new applications but if you’re one of the thousands of homebuyers who used it to buy your first home, some of the pros and cons still have the potential to apply.
If you were thinking of using the scheme, you might want to explore some alternatives instead, such as shared ownership or the First Homes scheme.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
What was the Help to Buy scheme?
Help to Buy was a government scheme designed to help first-time buyers in England buy their first home. The Help to Buy equity loan scheme, to give it its full name, was only available on new-build homes from developers registered with the scheme. There were also regional price limits on the homes that can be bought under the scheme. The final date for applying for a Help to Buy equity loan was 31 October 2022 and the scheme ended in England on 31 March 2023.
A version of the Help to Buy loan scheme is still available in Wales with slightly different rules, but there is currently no equivalent if you want to buy a home in Scotland or Northern Ireland.
How did the Help to Buy scheme work?
The Help to Buy equity loan scheme in England helped first-time buyers purchase a new-build home with just a 5% deposit. The government equity loan covered a further amount of the home’s value with buyers then having to cover the remainder with a standard repayment mortgage. The equity loan helped as it reduced the size of the mortgage home buyers needed, without having to save a larger deposit.
The size of the equity loan available depended on where you lived. Throughout England, homebuyers could borrow up to 20% of a home’s value. However, for those looking to buy in London, 40% loans were available, due to the higher property prices in the capital.
If you’re part of the Help to Buy scheme, interest isn’t charged on the equity loan for the first five years, but in year six you start paying monthly interest equivalent to 1.75% of the equity loan. The interest rate then rises by an amount equal to Consumer Price Index (CPI), which is a tool the government uses to measure inflation, plus 2% in April each year. The payment only covers the interest, not any of the loan amount.
From the beginning of your loan you will also have paid a management fee of £1 per month.
The equity loan itself can be paid back in full or in part (as long as it covers a minimum 10% of the property value) at any time. You must fully pay back the equity loan if you sell your property, pay off your mortgage or come to the end of the equity loan term, which is typically 25 years. You stop paying interest once the loan is repaid in full.
What were the 2021 changes to the Help to Buy scheme?
The original Help to Buy equity loan scheme was replaced by a new scheme for 2021-23, which itself came to an end on 31 March 2023.
Unlike the previous scheme, which was available to those taking their first step on to the property ladder and existing homeowners, the 2021-23 Help to Buy equity loan scheme is only available to first-time buyers.
In addition, while both versions of the scheme allowed applicants to take an equity loan worth up to 20% of the property value (or 40% in London), Help to Buy 2021-23 introduced regional price caps, limiting how much the house that was being bought could cost. For example, buyers in London could use Help to Buy for new-build house purchases worth up to £600,000, while the maximum property value allowed for those buying in the East Midlands was £261,900.
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What about Scotland, Wales, and Northern Ireland?
Help to Buy is available in Wales until March 2025 but the equity loan scheme has slightly different rules.
As was the situation in England, homebuyers in Wales who can provide a 5% deposit can get an equity loan that will cover a maximum of 20% of the value of a new-build home and has a five-year interest-free period. The main differences are that the price cap is set at £25300,000 across all of Wales and the scheme is still available to existing homeowners, as well as first-time buyers.
Both Scotland and Northern Ireland have other schemes designed to help those looking to buy a home, but neither currently offers a Help to Buy equity loan scheme.
Forces Help to Buy scheme
Under the Forces Help to buy scheme, which has recently been made permanently available, Armed Forces personnel can borrow up to 50% of their annual salary interest-free to put towards a home deposit. The Forces Help to Buy scheme caps loans at 50% of service personnel’s annual salary up to a maximum of £25,000, which can be repaid over a period of 10 years. Repayments can begin immediately, six months after receiving the loan, or during the final 10 years of service.
» MORE: How the Forces Help to Buy scheme works
The advantages of Help to Buy
Here are some reasons why Help to Buy was a good option for many people looking to buy their first home.
1. Only needed a 5% deposit
Saving a deposit can take years, especially if you want to qualify for a low loan-to-value (LTV) mortgage in order to try to access the most competitive deals. With an equity loan, the Help to Buy scheme allowed you to purchase a home with a smaller mortgage, at a lower LTV, even if you only had a 5% deposit.
2. Access low mortgage rates
Typically, a lower LTV means you can access a wider choice of mortgages and lower interest rates. So whereas a 5% deposit would normally limit you to a 95% LTV mortgage, if you used Help to Buy to access a 20% equity loan, you could start looking at 75% LTV mortgages, where the rates should be more competitive. If you were buying in London, where a 40% equity loan was available, an LTV of 55% could mean you were able to access even lower rates.
» MORE: See current mortgage rates
3. Interest-free for five years
With an interest-free loan period of five years, the potential strain of repaying the equity loan at the same time as your mortgage is removed in the short term. The early years of mortgage repayment are usually the toughest, particularly if your career is still developing or you’re raising a family, so the breathing space might be welcome.
Remember, though, that this leaway applies to the Help to Buy equity loan only, and not the monthly repayments on your mortgage.
» MORE: Mortgage repayment calculator
4. Low rate of interest when you start to pay
The interest rate of 1.75% that is eventually charged on an equity loan in year six tends to stack up well against the best personal loan rates.
That said, with the interest rate then increasing each subsequent year by the rate of CPI inflation plus 2%, it still has the potential to quickly increase.
5. An equity loan can be paid off at any time
You can reduce what you owe at any time by paying off either a proportion of the equity loan, equivalent to at least 10% of the current value of your home, or the entire amount in full.
If you manage to fully repay your loan within five years, you won’t pay any interest at all. However, a £200 administration fee is payable for each part-repayment or when making a full repayment.
The disadvantages of Help to Buy
Despite its obvious benefits, the Help to Buy equity loan scheme had some potential pitfalls to be aware of too. Here are some of the possible disadvantages.
1. The amount repayable isn’t fixed
Repayments on an equity loan were based on a percentage of your home’s value at the time you want to repay. This means the amount you pay back can change as the housing market and the value of your property fluctuates.
If your home goes up in value, you will need to repay more than the government initially loaned you. For example, if you took out a 20% Help to Buy equity loan on a property worth £180,000, this loan would be worth £36,000. However, should you want to repay in full, and your house has risen in value to £200,000, you would have to pay back £40,000 (20% of £200,000).
2. Equity loan interest rates can rise fast
After the five-year interest-free period ends, 1.75% interest is payable in the sixth year of having the loan. This is not unreasonable compared with the rates you might pay on other loans, but by increasing in line with CPI inflation plus 2% each year after, there is the potential for it to rise quickly and significantly.
3. Not all lenders offered Help to Buy mortgages
Help to Buy mortgages weren’t offered by all lenders, and the interest rates and terms had the potential to differ from a lender’s equivalent standard mortgage products too.
4. Remortgaging can be difficult
Having a Help to Buy equity loan can sometimes make it more difficult to remortgage. This is because there aren’t many Help to Buy remortgage deals to be found and most are only available to those who have paid off their equity loan. If you still have your equity loan outstanding, you can usually expect higher remortgage rates and fees.
The Help to Buy scheme also charges a flat £115 fee to remortgage, but depending on your lender’s standard variable rate, it could still be worth remortgaging.
5. Help to Buy was only available on new-build homes
If you prefer older architecture, then Help to Buy wasn’t for you. That’s because the Help to Buy scheme was limited to new-build properties, and only to homes built by developers that were taking part in the scheme too.
6. You may need permission to make alterations
If you want to alter the structure of a property you’re buying using a Help to Buy equity loan, you must get permission before proceeding. It’s possible major works will not be approved if you have an outstanding loan because the government would prefer the amount you owe not to increase, which could happen if the alterations increase the value of your property. If you don’t get permission, any rise in your home’s market value is added to your equity loan. You don’t need permission to redecorate or install a new kitchen or bathroom.
A £50 administration charge is payable when seeking permission.
7. Risk of negative equity
A House of Lords committee report, published in January 2022, suggested that in areas where help was needed the most, rather than working to support buyers, the Help to Buy scheme had inflated house prices so much that buyers would actually have been in a better position had the scheme not been introduced. The Financial Conduct Authority, the financial watchdog, also suggested in 2020 that those using Help to Buy are at greater risk of falling into negative equity if property prices start to fall, because the value of new-builds can quickly fall once they’ve been occupied.
Negativity equity is when the market value of a property falls below the amount that is left to repay on a mortgage. But with Help to Buy, your equity loan could still be outstanding too. The major problems with negative equity are that it can make it hard to remortgage and represent a significant barrier if you want to sell up and move.
8. Price caps
As you had to stay within the price caps for the region in which you wished to buy in order to be eligible for Help to Buy, this potentially restricted the housing options that were available to you. And as the regional boundaries needed to be drawn somewhere, it was possible for a considerable difference between the caps in two different areas that are not that far away from each other geographically.
Help to Buy scheme pros and cons at a glance
Here is a brief overview of the advantages and disadvantages of the Help to Buy equity loan scheme.
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» MORE: Best mortgage lenders
Dive even deeper
How to Remortgage to Consolidate Debt
Remortgaging to consolidate debt involves borrowing more on your mortgage to pay off other debts. This can make it easier to manage debt and could help lower your combined monthly debt repayments. However, more debt is secured against your home and you could end up paying more interest overall.
How to Remortgage to Pay for Home Improvements
Remortgaging to pay for home improvements or an extension may be an option if you have sufficient equity in your property and can prove to your lender a larger mortgage is affordable. Your income, outgoings and job status are some of the factors typically looked at when deciding whether you can afford a mortgage.
Do You Need a Solicitor to Remortgage?
The legal expertise of a solicitor will be needed if you remortgage with a new lender but may not be necessary if you take out a new deal with your current lender.